Category: ECB

The ECB has reached a historic turning point and will now end its QE program. So far, the ECB has been very successful in engineering the monetary policy reversal without triggering financial market volatility. This week’s decision by the European Court of Justice (ECJ) in favor of the ECB and against German euro critics is an important confirmation for the ECB’s course.

Monetary policy in the euro area will remain expansionary for a long time to come. The ECB has … [continue reading]

The ECB is sending a clear signal that it will exit its QE program by the end of this year. The ECB’s announcement is courageous as risks to the euro area outlook have increased significantly in recent months. Yet the announcement is wise as the ECB needs to prepare markets early in order to avoid the Fed’s taper tantrum of a few years ago.

Yet the ECB is maintaining enough flexibility to react to risks, should they materialize. Unfortunately, it … [continue reading]

The rising global uncertainty is now making it much harder for the European Central Bank to identify the right timing and speed for exiting its expansionary monetary policy stance. I still expect the ECB to end its QE program by the end of 2018, but the ECB will need to change its communication strategy. In order to remain flexible the ECB should not pre-commit itself to a particular policy path. This will fuel German objections, but it is important for … [continue reading]

The ECB is keeping its course and following its expansionary monetary policy stance. There had been expectations in Germany that the ECB would promise to end its purchase program in September, but these have been disappointed. The ECB has to keep its options open. The recent turmoil in financial markets, the stronger euro and disappointingly weak inflation in the euro area don’t bode well for a swift end of the purchase program. Despite the change in forward guidance, I now … [continue reading]

The ECB has to strike a delicate balance between preparing markets for an exit from QE and keeping its options open to extend its QE program further, if need be. The most difficult challenge for the ECB is that it is still not sufficiently fulfilling its price stability mandate despite a stronger than expected euro area recovery. The stronger Euro, which is pushing down inflation, does not make life any easier for the central bank.

The ECB is acting wisely by resisting pressure for a faster exit from QE. Continuity and reliability are two important elements of the ECB’s policy stance to avoid a taper tantrum and excessive market volatility. I am confident that the economic recovery of the euro area will allow the ECB to end its QE program in September 2018. But it is an illusion to expect a fast rise in interest rates after the end of QE. The low interest rate … [continue reading]

The ECB has chosen a gradual and cautious exit from its expansionary monetary policy stance. The decision gives the ECB a maximum of flexibility for exiting QE. I expect the ECB to terminate its QE program after September 2018 and to raise rates for the first time in 2019 at the earliest. The ECB can tighten policy only gradually as it is only slowly approaching its price stability mandate. The ECB has to maintain a high degree of flexibility in … [continue reading]

The decision of the German constitutional court concerning the lawsuit against ECB QE program is a false compromise. The constitutional court signals that it considers the ECB QE program as a violation of European law and to constitute monetary financing. Yet the constitutional court is not willing to take a decision itself at this stage, but rather asks the European court of justice (ECJ) for “advice”.

The ECB keeps its options open about the exit of its expansionary monetary policy stance. There has been no significant change in ECB communication. The statement by President Draghi makes a very gradual tapering of its bond purchases in 2018 the most likely path. Many open questions about ECB monetary policy remain unanswered. It is still open when the ECB will end its bond purchases and when it will start raising interest rates.

The ECB has now cautiously started its monetary policy reversal, even if only through words rather than deeds. The change in communication is an important step in the right direction.

Many in Germany consider the ECB’s exit as too slow. Many underestimate the importance of the ECB decision, which signals a sustained monetary policy tightening for the first time in more than ten years. The ECB is right in preparing the exit gradually and not abruptly in order not to … [continue reading]